2008 was, to say the least, not a great year for the global economy. With that, it should come as no surprise that it was also not a great year for the Toronto Stock Exchange (TSX), Canada’s largest marketplace for publicly traded companies. In fact, it was the worst year for initial public offerings (IPOs) in the history of the PricewaterhouseCoopers (PwC) annual survey of Canadian Equity. With only ten IPOs, none of which came about in the final six months of the year, the total value of the stocks issued on the TSX plunged 80 percent from $3.0 billion in 2007, to a mere 547 million. At the year’s end, there were 1,232 company stocks listed on the TSX. Fast forward a decade, and Canadian markets are nearing the end of 2018, which is predicted to be a “blockbuster year” by experts at PwC. Yet, as of last month’s TSX report, there are only 811 company stocks publicly traded on Canada’s principal exchange, a 34 percent drop from 2008.
…it was the worst year for initial public offerings (IPOs) in the history of the PricewaterhouseCoopers (PwC) annual survey of Canadian Equity.
Since its nadir in 2009, the Canadian economy has enjoyed a healthy recovery: national GDP has climbed by 36 percent, the unemployment rate has plummeted from a post-millennium high of 8.3 percent to a four-decade decade low of 5.8 percent, and Canada has emerged as a thriving startup ecosystem, ranking third on StartupBlink’s annual report in 2017. What is shocking, is that despite this upward economic trajectory, the number of publicly traded companies continues to decline. Although this phenomenon lacks a single root cause, it is being driven by two principal factors: disillusionment with the hassle of public markets coupled with a surge in the availability of private investment.
…despite this upward economic trajectory, the number of publicly traded companies continues to decline.
The Economist describes the process of going public as “an immediate nightmare, which is a cross between an election campaign, a show trial and an Ironman event.” During this time, founders must determine a strategy, prepare the requisite legal documents, and assemble a board of directors in a mere couple of months. Once the nightmare is over and the flotation process is complete, further hardships lie ahead.. One of the biggest surprises is the founder’s complete and unconditional accountability to thousands of newly minted shareholders, who, as told by Forbes, will [send] nasty emails and think you aren’t worth your paycheck.” Shareholders care about nothing but the short-term stock price. The pressure to maximize the share price at the end of each quarter puts immense stress on founders to maximize the company’s value in the immediate term.
In an interview with Maclean’s Magazine, Ari Pandes, an associate professor at the University of Calgary, explains the stark difference between guiding a public vs. a private company: “All of these people are on you if you don’t produce a result within a quarter, whereas before you might have had people who were more long-term oriented. This short-term chase really makes it more onerous on management teams.” Pandes refers to this as a “fatigue” with public markets, where many executive teams would prefer the flexibility and comfort that comes with managing a private company.
No level of fatigue is capable of slowing down public investment without a viable alternative. Conveniently – at least for IPO-averse management teams – access to private financing, in the form of both private equity and venture capital, has exploded over the past decade. According to the Canadian Venture Capital and Private Equity Association (CVCA), in 2009, Canadian private equity deals totaled just over $5 billion, less than an eighth of the $42.2 billion of private equity activity completed in a frenzied 2014. While 2014 seems like a banner year for Canadian private equity, highlighted by the 12.5 billion Tim Hortons mega-merger with Burger King, the market looks to have settled at a relatively high watermark, with $26.3 billion of deals in 2017 and $14.5 billion in the first half of this year. Venture capital has experienced a similar rise, increasing from $993 million in 2009 to $3.5 billion last year. 2018 is poised to be a record year, with $1.9 billion in venture capital funding raised in the first half alone.
Conveniently – at least for IPO-averse management teams – access to private financing, in the form of both private equity and venture capital, has exploded over the past decade.
While stocks have been vanishing from the TSX, Exchange Traded Funds (ETFs) have sprouted in their place. An ETF is a diversified bundle of stocks, bonds, and other assets (similar to a mutual fund) traded on an exchange like a corporate stock. Compared to mutual funds, ETFs are characterized by lower fees and superior liquidity. In Canada, ETFs are issued by a wide range of firms including the Bank of Montreal, BlackRock (the world’s largest asset manager), and First Asset, a subsidiary of Canadian investment giant CI Financial. ETFs have experienced staggering growth over the past decade. In 2008, there were under 100 listed on the TSX, by the end of September 2018, there were 600. Despite their rapid growth, ETFs only constitute $160 billion of the Toronto Stock Exchange’s $2.29 trillion market cap, good for just under seven percent.
While ETFs improve market liquidity and provide some opportunity to shareholders, their broader economic impact cannot compare to that of a public company. And as more and more companies remain private, relying on funding from private equity and venture capital, their earnings are reaped by only the wealthiest financiers, excluding average investors from some of the most lucrative offerings. Specifically, with 421 fewer publicly traded companies than there were in 2008, Canadian investors have far less selection than they did a decade ago. Further, the decline in selection has affected the asset mix of the Canadian Pension Plan; Canadian equities constituted 25 percent of the fund in 2008 compared to a mere 3.3 percent in 2017.
While ETFs improve market liquidity and provide some opportunity to shareholders, their broader economic impact cannot compare to that of a public company.
The decline of Canadian IPOs has led to another troubling economic trend; the consolidation of Canada’s largest companies. Some headline-grabbing deals include the 28 billion acquisition of Spectra Energy by Enbridge, Canada’s fourth largest company, and Metro’s creation of a 16 billion retail empire following the 4.5 billion acquisition of Jean Coutu. Since 2015 , the average market capitalization of companies in the S&P/TSX 60 — an index of 60 large public Canadian corporations, has increased 14 percent, compared to only 10 percent growth in the national economy. The rise of corporate consolidation has contributed to the oligopolization of Canadian industries such as financial services, telecommunications, and retail. Maybe most frighteningly, the consolidation of large corporations creates a positive feedback loop.. As companies grow through acquisitions, they have greater access to capital, which provides funding for even more acquisitions in the future.
The decline of Canadian IPOs has led to another troubling economic trend; the consolidation of Canada’s largest companies.
The dwindling numbers of publicly traded companies is not a uniquely Canadian predicament. A similar phenomenon has occurred south of the border, where the number of publicly traded companies in the United States in 2017 was 3600, less than half of the number two decades prior. In the States, opinions differ wildly on the threat of corporate consolidation and the disappearing IPO. In his article titled Private Inequity, Frank Partnoy of the Atlantic argues that the decline of IPOs is harming smaller investors, citing speeches from SEC Chair Jay Clayton, and an interview with Jay Ritter of University of Florida, a leader scholar on IPOs, as evidence that the changing corporate landscape is a threat to average Americans. The Bloomberg Opinion Editorial Board counters Partnoy’s position, referencing a recent study conducted at the University of Virginia that concluded public index funds yield similar returns to more exclusive private investment opportunities. The Editorial Board continues, “adjusted for risk, private-equity investments of recent vintage have actually lagged public markets.”
None of this is to say the IPO is completely dead. This past summer, PwC’s national survey dubbed the first half of 2018 “slow and steady”, with a total of nine TSX issues over the year’s first six months. Nonetheless, the severely stunted IPO climate reflects underlying shifts in social attitudes and paradigms. Akin to individuals seeking refuge from the incessant pressures of social media, businesses favour the comfort and control of staying private, shielding themselves from the scrutiny of the public sphere.
…the severely stunted IPO climate reflects underlying shifts in social attitudes and paradigms.